REAL ESTATE GUEST BLOGGER -- MEGAN ZAIDAN

Making the most of exclusive-use provisions in leases for landlords and tenants

Blog Entry: December 16, 2013 4:30 AM | Author:

Megan Zaidan is an attorney at Walter | Haverfield.

Exclusive-use provisions are commonly negotiated by landlords and tenants in commercial leases, especially for retail properties, but sometimes the most important aspects of the exclusive use provision are overlooked, including the tenant's remedy if the provision is violated.

In other instances, the exclusive-use clause may be too narrow to allow the landlord flexibility in leasing. Without a remedy, the exclusive use provision is essentially meaningless, as the tenant has no way to recover damages or losses in the event of a violation. If the exclusive use is overly broad, the landlord may be limited in its leasing opportunities.

What is an exclusive use?

An exclusive-use provision grants a tenant the right to operate a particular use exclusively within a defined shopping area. For example, a tenant operating a Mexican restaurant may negotiate a provision prohibiting the landlord from leasing or allowing other tenants from operating a restaurant serving Mexican food. Exclusive-use clauses are valuable to tenants because they ensure that the tenant won't have to face direct competition in the immediate vicinity.

How is an exclusive use violated?

Exclusive-use provisions can be violated by the landlord in two general ways: (i) by directly leasing to a competing user; or (ii) by failing to enforce the existing tenant's exclusive use. In either event, the tenant will want to seek some remedy for the likely decrease in sales if a competing user operates in the defined shopping area.

What are a tenant's remedies for the violation of its exclusive use?

Remedies available to tenants if the exclusive use provision is breached include: (i) rent abatement during the time period that the competing operates, and (ii) the right to terminate the lease if the competing use does not cease within a specified time period.

Further, when a landlord does not directly enter into a lease for a competing use, but an existing tenant either changes its operation to a competing use or assigns or subleases its rights to a competing user, the tenant will want the landlord to be held to the standard of using commercially reasonable efforts to stop the competing use. A tenant also may seek to use commercially reasonable efforts at the landlord's cost and expense to stop the competing use if the landlord fails to do so.

What incentive does a landlord have to grant an exclusive use?

From the landlord's perspective, granting an exclusive-use clause can be beneficial, particularly if tenants are paying percentage rent. By ensuring that there will not be competing users within the same retail center, landlords can maximize each tenant's profits and increase the amount of percentage rent collected from each tenant. Furthermore, by narrowly tailoring an exclusive-use clause, a landlord can grant a tenant the exclusive-use protection it desires, while still maintaining the flexibility the landlord needs to lease up its retail center.

How can a landlord narrowly tailor an exclusive use?

Using the Mexican restaurant example above, a landlord might seek to permit the “incidental” sale of Mexican food — defined as less than “X%” of another tenant's gross sales. This would allow the landlord the flexibility to lease to another restaurant that serves a wide variety of food with Mexican food making up a small portion of that tenant's menu.

Using the Mexican restaurant example above, a landlord might seek to permit the “incidental” sale of Mexican food — defined as less than “X%” of another tenant's gross sales. This would allow the landlord the flexibility to lease to another restaurant that serves a wide variety of food with Mexican food making up a small portion of that tenant's menu.

Further, a landlord would want to include a provision that the tenant's exclusive use is only valid for such time as the tenant is actually open and operating the exclusive use. Using the Mexican food example again, this would allow the landlord to lease to another Mexican restaurant in the event that the first Mexican restaurant decided to stop operating as a Mexican restaurant and instead operate as a Chinese restaurant.

In sum, exclusive use provisions can benefit both landlords and tenants when the exclusive-use clause is properly drafted. From the tenant's perspective, a properly drafted exclusive use clause will provide for a remedy if the landlord violates the tenant's exclusive use. From the landlord's perspective, a properly drafted exclusive-use clause will be narrowly tailored to allow the landlord to lease up its retail center.

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